Assisting in recovery post COVID-19.

Experts are predicting an increase of activity in the area of private lending and capital raising. This is because while government measures have provided a base level of economic stability, many businesses are expected to experience crippling levels of financial distress and an inability to service loan facilities.

Ernst and Young (EY) Partner and Joint National Head of Capital & Debt Advisory Sebastian Paphitis, commented late last month that this was evident from the banking sector "with our major banks already flagging $220bn in loan deferrals and increases in loan loss levels. As a result, we have seen the major banks already take action to protect their positions via raising additional capital and reducing dividend payments."

This means that there is an unprecedented opportunity for investors in private equity and private debt to provide solutions to distressed businesses, increasing their activity within capital raising and purchasing non-performing loan portfolios .

What role will private capital play?

In our March article, we mentioned that the Private Lending Market had grown exponentially, recently surpassing $100bn in value. Experts in the sector like Sebastian predict that the capital available to be deployed will likely be targeted towards businesses within specific industries, namely employment heavy, experiential sectors such as tourism and hospitality; non-essential product or service sectors like retail and real estate; as well as financial services amongst others.

"The expected funding requests will include some from the pool of expected bank losses identified earlier, but will also include other businesses that survive, but have balance sheets leveraged up off the back of recent growth and M&A or from drawing liquidity lines since the onset of COVID-19. For many of these businesses, leverage levels may simply become unsustainable, opening up the opportunity for investors with flexible capital to assist them with a mix of debt and equity capital solutions."

The inherent flexibility available in private lending solutions will better place providers to individually assess the wide and varied array of distressed situations that will undoubtedly present themselves and to determine the solution and capital level required on a case by case basis.

So, while the future impacts of COVID 19 are hard to predict, it appears that the economic fallout from the pandemic will contribute to substantial future growth in private capital raising and for this market to play an important role in the funding of Australian companies in coming years.

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